Disadvantages of FIFO
1. Higher Tax Liability: Under the FIFO method, the difference between profit and cost is wide, which can cause the organization to pay a higher tax. So, it is essential that, when using the FIFO method, the organization does not overstate its profits.
2. Clerical Errors: When the organization uses manual inventory recording systems, it becomes relatively difficult for the employees to record the cost of goods and selling prices correctly as there are high price fluctuations. Also, falling or rising market prices can result in discrepancies and clerical mistakes, which can affect inventory and overstate or understate profits.
3. Overstates Profits: When inflation in the market is high, companies that have employed the FIFO method of inventory valuation report higher profits than they earn. This causes a misstatement in the financial statement, and sometimes the accounting records might not disclose the exact result of the organization.
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